Thursday, August 27, 2015

Yesterday I argued that SaaS founders and investors shouldn’t worry about short-term movements of SaaS stocks and said that there are a lot of reasons to be bullish about the Cloud. Here are some of them.

1) SaaS is quickly becoming the norm
In the last years there’s been a dramatic shift in deployment preferences of software buyers. According to a survey by technology evaluation business Software Advice, 88% of buyers with a deployment preference preferred on-premise solutions in 2008. Just six years later, the results were completely upside-down: In 2014, 87% of all buyers with a deployment preference preferred Cloud solutions.

2) Billions of dollars of on-premise revenues are still up for grabs
In spite of this tectonic shift of deployment preferences, IDC estimates that in 2015 the market share of on-premise deployments in the enterprise applications market is still almost 80%. That means that billions of dollars will move from on-premise to the Cloud in the next ten years.

3) Millennials will move up through the ranks
In the near future, more and more IT decision maker positions will be taken over by millennials. For this generation, which grew up with Facebook and Gmail, SaaS will be the default choice. In fact, most of them will laugh at the idea that software could not be Cloud-based.

4) The entire software market will continue to grow
It’s not only about increasing the Cloud’s piece at the expense of the on-premise piece, though. Pen & paper or Excel sheets are still used by myriads of people for all kinds of business processes, especially in SMBs. Building better, Cloud-based solutions for these use cases will significantly increase the size of the total software cake.

5) Mobile expands the market to non-desk workers
About ten years ago, the number of smartphone users was negligible. Today there are more than two billion smartphone users worldwide. This development, which I think is nothing short of amazing, has (almost) suddenly increased the number of target users for B2B software companies by tens of millions in the industrialized countries alone. People in industries like construction, landscaping, hospitality and many other areas of “non-desk work”, who previously weren’t using any software, are now getting mobile apps that help them become more efficient.

6) New technologies will catalyze adoption
SaaS has always been more than just a better deployment option. It has enabled the creation of new ecosystems (Salesforce.com), new business models (Zenefits), new distribution strategies (Zendesk) and much more. The next wave of enterprise software will likely be powered by machine learning (check out this TechCrunch post for a good primer) and continued consumerization (and in some cases, new hardware). These and other innovations will allow SaaS applications to get even wider adoption and to provide even more value to its customers.

This is by no means meant to be an exhaustive list, and there are many more reasons to be bullish on SaaS. Want to let me know what you’re most bullish about? Tweet it to me!

Tuesday, August 25, 2015

If one looks at the stock price development of public SaaS companies in the last few weeks, one could come to the conclusion that SaaS is over the hill. Salesforce.com: 17% down from its 52 week high. Veeva: 30% down from its 52 week high. Workday is 29% down, Box 47%, Hubspot 22%. Everyone got hit, as you can see in Tomasz Tunguz' post about the topic.

There are several reasons why this conclusion (that SaaS is past its prime) is wrong. Firstly, it's not just SaaS stocks which took a dive. The NASDAQ and the Dow Jones are both down more than 13% from their 52 week highs, too. Secondly, as this chart of the BVP Cloud Computing Index shows, SaaS stocks have outperformed the market significantly in the last couple of years, and it's not surprising that when the market corrects, stocks that went up more strongly than others are going down more strongly as well.

More importantly though, while public markets are good at valuing companies in the very long run, short term movements are – if not random – the result of all kinds of factors, most importantly supply and demand for stocks as an asset class, which itself depend on all kinds of factors that are not related to a specific company's ability to generate profits in the long run. That's why long-term public markets investors – let alone SaaS founders or VCs – shouldn't worry about the short-term movements of SaaS stocks.

Fundamentally, there are lot of reasons to be bullish about the Cloud. I'll follow-up on that with another post soon.